Capital Budgeting, its techniques and importance explained with example

Capital budgeting is also known as “investment appraisal”.


“Capital budgeting is the process of deciding whether to make investment in long term assets (fixed assets) or not.”

In other words capital budgeting is the decision making process in respect of long term assets.


Apple (the famous company) has purchased the streaming radio service “Beats” which includes both Beats Audio Hardware and Beats Music. The deal was settled in $3 billion which is one of the highest deals ever. The deal is so large that the outcome of the decision will affect Apple’s future but the question arises how Apple made the decision of investing $ 3 billion. The answer lies in capital budgeting process.

Techniques / Models of Capital Budgeting

Words “techniques” & “models” are interchangeably used to refer the evaluation criteria for decision making in respect of investment in long term assets.
These techniques or models are

  1. Net present value (npv)
  2. Payback period
  3. Profitability index (benefit / cost ratio)
  4. Internal rate of return (IRR)

Importance & Significance

The importance of capital budgeting is evident from the example given above. Fixed assets decisions involve huge investments that can significantly affect a business’s future position. Therefore such decision should be made in a formal style to avoid risks and losses to the business. Capital budgeting process provides us the frame work for making safe decisions.


Share this



About Us

Guidanceportal is a place to learn “the Knowledge” not mere information. Our vision is to spread knowledge of different fields of study and provide guidance in the most simplest and self explanatory way. Our team consists of skillful personnel working in different fields of life who share their practical experience and knowledge.

We understand the importance of continuous refinement & improvement thus your participation in the form of comments will be highly appreciated.

Guidanceportal Team